Banking on the unbanked will be tough business

Banking on the unbanked will be tough business
White label ATMs are springing up everywhere. What has caught the fancy of banks and consumers alike is the huge financial inclusion takeaway which white label ATMs (or WLAs) bring with them. 
 
Similar to any other ATM but installed without a bank label (in short ‘white’ label featuring not bank name) WLAs have attracted non-banking financial institutions who are seeing a growing business model in, what is hopefully, a sunrise segment in the banking services sector.

Industry experts feel that firming up plans to make WLA ventures viable, negotiating with banks for sponsorships, selecting locations and analysing the competition are issues that take time. 

As investments involved in setting up white-label ATMs are high, it is a difficult proposition for many companies, according to London-based Retail Banking Research (RBR). 

NPCI Chief Executive A P Hota has reportedly said that all white label ATM companies are working on financial viability. 

So much so, that NPCI has set up a separate group to help companies begin operations in this space.

Low margins

Some point out that except in the metro and urban areas, hits (per-day use of ATMs) are low, raising concerns on the viability of these ATMs. 

“The interchange fees banks will pay for ATM transactions are fairly low and profits are not going to be easy. While traffic (per-day use of ATMs) is quite good in urban locations, the activity falls sharply in semi-urban and rural areas,” said a top investment banking professional.

The central bank has been alive to the situation and reviewing regulations, but an RBI official Deccan Herald spoke to declined to specify if the norms would be relaxed.

Analysts tracking the Tata Group's progress in this segment were cautious, saying it is possible for the first movers to gain momentum while other companies might slowly withdraw from the scene. 

A senior executive of the Tata venture said after the rollout, the company had tweaked the business model to focus on opening ATMs in tier-II locations and beyond.

Presence in metropolitan regions, which have a high density of bank ATMs, will be low on the company’s priority list.

Providing round-the-clock security will also impact rollout plans of WLA companies. Police are demanding enhanced security at ATMs. A senior executive of an ATM services company said, “With the police insisting on a guard at every ATM, we have one more cost (at least Rs 30,000 a month) factor to grapple with. This comes at a time when we are grappling with the issue of thin margins.”

Then there is the issue of a conflict between managed ATMs (those run on behalf of banks) and WLAs. 
 
Many of those who have secured in-principle nod from the central bank for WLAs operations also manage ATMs for banks.

The last three months have seen two investments in ATM companies. 
 
While Japan’s Hitachi acquired controlling stake in Prizm Payments Ltd, ICICI Ventures invested a substantial amount in BTI Payments Ltd. 
 
Both companies are entering the WLA segment and in advanced stages of rolling out such ATMs.

Will the profits roll in?

Profitability depends on the company’s long-term perspective, says an expert, who feels that the business is not for companies looking at quick returns and unwilling to go through the entire learning process. 
 
"We look at it from a very long-term perspective and we are willing to learn along the way," said Sanjeev Patel of TCPSL, while conceding that the overall business is approaching profitability.

"We operate with different models and WLAs are a relatively low-cost model because of the locations we operate in and formats we use," Patel says and points out that the only problem is that there aren’t enough ATM cardholders in those areas. 
 
But the company has found that if the locations are good (where there are transactions), it works well because the whole revenue model is linked to transactions.

Over and above this, RBI allows opportunities such as advertisement or other value-added services at these ATMs. 
 
So, non-bank companies have already started working on those, and these will form alternative revenue streams. 

One has to be willing to put in the investment and let it grow.

A key factor deciding the viability of the business model is the rental that companies have to pay for the space. 
 
“We need to have our rentals low, at least below what a bank would be paying for its own ATM nearby,” Patel said. Depending upon rentals, every WLA needs to get in 75-125 transactions a day to make the investments viable, he said. 
 
Under the revenue-sharing model with banks, TCPSL will receive Rs 15 for every cash transaction and Rs 5 per balance enquiry.

One school of thinking in the industry is in favour of raising this to Rs 20 per transaction from Rs 15 (amount which the ATM operator will charge the bank whose card is used for withdrawals).

There is the need to look at interchange to ensure that it is worthwhile investing in such locations. And, additional revenue streams need to be developed. 
 
The ATM site might be used to provide other services like ticketing, bill payment or, maybe, even photocopying services to create footfalls.

While in urban locations, it is easier to find shops to install an ATM and run them, smaller locations call for experimentation with different formats, often for the first time. 

A lot of the sourcing in smaller locations had to be done by the staff as there were no brokers available. 

The installation process, again, is more difficult because everything from refilling cash and managing connectivity has to be managed by them.

“In some rural areas, we are facing issues of market development. 
 
So, we are getting in touch with the shopkeepers near the ATMs who then evangelise the machine. 
 
People looking for an ATM in a busy marketplace or a bus-stand often walk up to a shop asking for a bank ATM. The shopkeeper then points to the WLA and explains that money can be withdrawn from the machines,” said TCPSL's Patel.

The RBI spark

The story started in February 2012, when the banking regulator issued draft guidelines inviting comments and then came out with the final guidelines in June of the same year. 
 
But the real momentum came in mid-2013 when the Reserve Bank of India (RBI) gave in-principle approval to six non-banking entities, including Tata Communications Payment Solutions and Muthoot Finance, to set up white label ATMs in the country.

The other non-banking entities to which RBI issued certificates for setting up and operating WLAs are Prizm Payment Services, Srei Infrastructure Finance, AGS Transact and Vakrangee Ltd. 

Currently, most of the ATMs belong to banks, but the cash dispensing machines now owned and operated by non-banking companies are called White Label ATMs (WLAs). 

The primary objective of RBI was to enhance the spread of ATMs in semi-urban and rural areas (mainly in tier III to VI  towns), where bank-owned ATM penetration was not growing.  
 
Under the new guidelines,  the 1:2 licence means that for every ATMs put in tier III-IV locations, one ATM is allowed in an urban location. 

So, it is skewed towards locations that normally did not have ATMs before.

For starters, Tata Communications Payment Solutions (TCPSL) launched operations first, followed by Muthoot and Prizm, while Vakrangee is likely to commence its service shortly.

TCPSL, a wholly-owned subsidiary of BSE-listed Tata Communications, has so far successfully deployed over 1,000 WLAs across the country. 
 
In fact, it deployed the 1,000th Indicash ATM — India’s first white label ATM network for India from TCPSL on March 24 at Bhondsi, a Tier 4 village in Gurgaon, Haryana.

The Indicash rollout of a 100-strong ATM network across Delhi follows TCPSL’s initial launch in Chandrapada village of Thane( Maharashtra) in June last year. 

Over the last nine months, its WLA network has grown across 650 towns and villages in key states like Maharashtra, Karnataka, West Bengal, Bihar, Jharkhand, Kerala, Gujarat, Tamil Nadu, Uttar Pradesh, Madhya Pradesh, Gujarat and Andhra Pradesh.

The company is committed to rolling out 15,000 ATMs across India by June 2016, with strong focus on driving ATM penetration in the Tier 3-6 markets given the fact that on the world’s global stage, India is an under-penetrated ATM market with just 125 ATMs per million people (the US has 1,390 ATMs per million people, while it is 530 in the UK and 211 in China). 

Indicash now targets setting up of over 1,000 WLAs across Karnataka by 2016. 
 
The company presently has 15 operational Indicash ATM centres in Bangalore in locations like Madiwala, Chandra Layout, Yeshwanthpur, Indiranagar, Hessarghatta, Kundalahalli, Bangalore Rural, Nagashettyhalli, Chokkasandra, C N Halli, Frazer Town, Shivajinagar, Banashankari, Rajajinagar and Jayanagar.

Gold loan financing company Muthoot Finance launched its first white label automated teller machine (ATM) in Kochi on March 6. 
 
“We have gone the extra mile by challenging ourselves to set up 9,000 WLAs within three years with first 100 ATMs in March itself," George Alexander Muthoot, managing director, Muthoot Finance, said, adding that his company would see about 1,000 white label ATMs in the first year, followed by 2,000 in the second and 6,000 ATMs in the third.

Muthoot  also plans to introduce loyalty programmes for WLA users like exclusive counters at select centres with services like money transfer, foreign exchange, air ticketing and bill payments, among others.  

Prizm Payment Services plans to deploy at least 10,000 of its Money Spot ATMs across India in the first phase of rollout, with a substantial portion being in semi-urban and rural areas. 

By and large, WLAs are seen as a blessing for banks, which are grappling with dwindling deposits and declining demand for loans. 

YES Bank's Group President (Retail & Business Banking) says:  "For banks, there are multiple benefits. WLAs can give us visibility, increase our reach and will be a tool for customer acquisition as well as servicing." 

It (WLAs) will enable us to save costs, which banks currently incur on network expansion and maintenance. 

WLAs are quite prevalent in advanced nations, so a majority are optimistic that it can happen in India too; after all, white label ATMs are really more of a logistics and operations business than a banking business.

Face it, to this day, it is not the banks which manage ATMs; the work is outsourced to other companies. 

So, banks will move organically towards WLAs as the economics becomes more viable for everybody. 

In all eventualities and regardless of the teething troubles facing WLA companies, the clear winner is going to be the customer, who will have wider and easier access to a host of financial services under one roof. 
 
And, at his convenience. 

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